Evidence of a Brazilian Recession Seen in May's Industry Drop

(Bloomberg) -- Signs that Latin America's largest economy may be slipping into recession increased with the decline of industrial output in May.

Brazilian production fell 0.2% from April after a 0.3% increase a month earlier, the national statistics agency reported Tuesday. May output rose 7.1% from the same month a year ago, when production suffered the impact of a devastating trucker strike. It would take a very strong performance in June to stop the country's industry from declining in the second quarter, said William Jackson, chief emerging markets economist at Capital Economics.

“That seems unlikely – surveys point to continued weakness, and other sectors of the economy remain sluggish,” Jackson wrote in a note to clients. ”So there's a good chance that GDP contracted for a second consecutive quarter.”

Brazil's industry has fallen during three of five months so far this year, contributing to the 0.2% contraction in first-quarter GDP. Demand is depressed in neighboring Argentina that's mired in recession and also at home, where consumers are suffering double-digit unemployment. And while there are signs investment has picked up, significant capital deployment is on hold unless a pension reform is approved.

Of the 26 industrial sectors monitored, 18 fell from the previous month, according to the statistics institute. Output of consumer goods plunged 1.8%, the biggest drop since last May's trucker strike, and production of cars, trailers and chassis fell 2.4%.

What Our Economist Says

“As expected, industrial production rebounded from year-ago levels -- when production was disrupted by the 10-day trucker strike. However, the comparison with April figures is underwhelming -- the 0.2% MoM drop reinforces the picture of lackluster industrial performance and increases the chance of a weak 2Q GDP.”
--Adriana Dupita, Latin America economist
--To read the research, click here

With the economy still struggling and inflation subdued, economists are now betting the central bank will lower the benchmark Selic rate by a full percentage point to 5.5% before year-end. A hobbled industrial sector, as revealed in May, is consistent with a scenario of monetary easing, according to Mauricio Nakahodo, an economist at Banco MUFG Brasil.

Speaking in Zurich on Tuesday, Brazil's central bank president Roberto Campos Neto repeated his recent warnings about the economy.

“Not only growth has disappointed, but the recovery of growth has been interrupted,” he said.

--With assistance from Rafael Mendes, Felipe Saturnino and Fergal O'Brien.

To contact the reporter on this story: David Biller in Rio de Janeiro at dbiller1@bloomberg.net

To contact the editors responsible for this story: Juan Pablo Spinetto at jspinetto@bloomberg.net, ;Walter Brandimarte at wbrandimarte@bloomberg.net, Robert Jameson

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